I know this topic has been done to death and there
have been numerous ratio’s used to support one argument or the other depending
on who is paying the bills and level of independence involved. However the real measure of
affordability I am going to suggest might be something different. It will also be something that can be
measured when the most recent data from the census is released.

In looking at the affordability matrix, analysts
have typically looked at household incomes or individual incomes to determine
what the level of repayments that can be sustained or the multiplier of income
to median house prices is. From
this, the market is either at, above or below historical levels. What it fails to take into
consideration is the time value proposition for money, duration of debt and
equity achieved. The average loan
size tells more about what is going on than any ratio.

Interestingly the research actually shows that
what people can afford to pay as a measure of average loan sizes suggests that
a temporary ceiling has been reached.
The average loan size in Queensland has been hovering around $275,000
for the past 2-3 years which is essentially the centre point for the bell
curve. Fixed at five years this
equates to a weekly repayment of around $660 per week. However as interest rates appear set to
fall, there should not be the expected inverse correlation of purchasers
looking to borrow more. The
expected outcome is that some of this money will find its way back into
retailers pockets.

Another important factor to note is that over the
past twenty years, the average monthly growth in loan size is 0.59%. If this was applied to the starting
point in the time series, the current monthly loan size for Non-FHB’s would be
$279,631. The actual loan size at
this point in time is $279,900. Quite
clearly the excesses of the 2003 to 2009 period can be seen in the graph below
with the impact this has had on the average monthly increase line. Having said that, the graph also gives
consideration to the difficult economic times of the 1990’s, so there is some
degree of balance.

The
above graph doesn’t show the changing market sentiment, however recent history
allows us this quick view in the rear view mirror. The 2003 to 2009 period saw the market shift from the Non
FHB to the FHB. Hence this actually
exacerbated the residential market run.
So whilst the author acknowledges the peak in 2007 in the residential
market, structurally it changed to take on unprecedented characteristics not
seen since reliable data collection occurred. This change is outlined in the graph below.

The interesting aspect of the average home loan
size is that for the majority of the last two decades, Non-first home buyers
have typically had the larger average mortgage. This has been turned upside down in the last five years with
first home buyers taking on mortgages that have at times been over $30,000 more
than the former. Admittedly this
occurred when they received stimulus funding both at a Federal and State level
which in hindsight probably saw some purchasers biting off more than they could
chew. It is too early to tell
whether this correction back to more normal cycles is underway, though the
expectation of NPR is that by this time next year, Non-FHB’s will again be
taking on slightly larger debt than the first home buyer market.

This is a really important trend for the
residential market. The benefit of
having a stronger Non-FHB market is that it represents a much larger part of
the buying cohort and signals that a more normal cycle is likely to get underway. The other really important part of the
change back is that the equity that this buyer has allows them to purchase both
new and established dwellings more easily. This is the sector of the market that needs to gain in
confidence and will also be the one that benefits the residential sector the
most from a decline in interest rates.